How Scrip can Save us from the coming Depression

My grandfather was an eccentric.  He went to Harvard aged sixteen, later dropping out to pursue his interests in newspapers and various entrepreneurial projects.  Shortly after the war, he created “The Boyd System”, the country’s first credit card system.  It operated in small regions of New Jersey and Pennsylvania.  The system quickly failed, because people did not understand that goods purchased with the cards would have to be paid for (eventually); My grandfather ended up having to foot the bill for the finery that many people had bought under the impression they would never have to be paid for.  This last fact reveals a truth about the human conscience that is not readily apparent today: new developments in technology must also be met with more refinements in the human psyche.  Capitalism leads us to believe that humans behave with the same rational self-interest in one situation as they do in another.  This is untrue.  Humans must be taught how to behave under a specific system, otherwise the system itself will fail (or those forced to live under it will suffer).

It’s fitting that my Grandfather spent the last few years of his life on a book about credit and currency.  His quest was more than a little Quixotic: when he died, there were approximately 5 manuscript copies in the hands of seven different editors.  The book itself was about as disorganized as the room in which my Grandfather died.  I had several opportunities to pick my Grandfather’s brain before he died.  Most of the time he called me ‘brainwashed’ for the classical economic education I was receiving at college.  Naturally I was keen to prove him wrong with my newly-learned Keynesian dogma.  In many cases I think we were arguing over moot points–his vitriolic anxieties about the current economic order found expression in his frequent attacks on my beliefs.

My Grandfather had a few salient points to offer which I think will profit anyone trying to make sense of the current economic crisis.

1.  The United States Government is being strangled by the debt it has sold to foreign buyers.

The Chinese and Japanese have more or less footed the bill for the last ten years of consumer profligacy in the United States.  To pessimistic commentators, this much is obvious.  The cheap loans which American companies and individuals enjoyed was largely created by the enormous foreign currency reserves that the Chinese accumulated through artificial inflation of the U.S. Dollar.  By purchasing massive amounts of Treasury bonds, the Chinese were effectively able to depreciate their own currency against the U.S. Dollar, thereby stimulating their own export markets and feeding the American appetite for non-durable consumer goods (flat-screen televisions, lawn furniture, etc.).

2.  The current crisis in the market can be traced back to the currency that the engines of Capital and Commerce must share.

This remains my Grandfather’s most salient point.  With a little explanation, this is easy to see.  Commerce is geared towards a currency that has no residual value at all.  The U.S. dollar, importantly, states that it is valid for “all debts public and private”; While the U.S. Dollar is in its current apparition a far cry from the Gold standard dollar of yore, it still retains value in and of itself (that is, Capital reserves are expressed in dollar values, and loans are made between companies in dollar values).

The most important point to recognize here is that it is in the individual’s interest to hoard as much money as possible.  This is even more true today, when investments in companies and money market accounts are particularly shaky propositions.  The impetus of an investor is to either retain cash or to purchase things that are of hard values–Gold, Oil futures, etc.  Contrast this with the interests of commerce, and one can easily see why the interests of commerce are fundamentally opposed to the interests of capital.

To a commercial company (a company that offers a good or a service; not capital), the more money there is in circulation, the better.  Of course in cases of hyperinflation this is not true, but the reason that a central bank must sustain a small level of inflation is that it must maintain liquidity–if the amount of money in an economy is fixed, then commerce will be strangled by a lack of currency.  If someone wants to purchase a good or service, they must have cash in hand.  However if cash is scarce (people are hoarding), then commerce suffers.

The way a depression is created, then, is if there is no cash available for commerce–if it is kept under lock and key by the forces of capital.  No small wonder then that the Great Depression saw multiple Scrip currencies created that were not tied at all to any hard value but were used for commercial transactions.

3.  The way to dissolve the opposition between the forces of Capital and Commerce is to create a separate currency for each sector.

It seems obvious, doesn’t it?  Let’s say the US Government creates a new currency called the “Peso” that had no residual value, and is not printed in notes.  Each peso only holds value for a year after the last transaction it was used in.  Every company retains a balance sheet, showing how many pesos they owe to various individuals and companies, and how many pesos they are owed by various individuals and companies.

If the system above is properly implemented (I have never seen it on a national scale; the examples I know of, like the Swiss “Wir Bank” have only been implemented on a small scale), the results are straightforward.  If the only way that one can redeem the value of a peso is to purchase a good or a service from another company, then commercial transcations overall are stimulated.  If the government implements a system whereby one can exchange pesos for dollars (the latter being a currency that actually retains residual value) at a 5% loss on the dollar, then the impetus remains to purchase goods instead of hoarding capital.

This system may never work on a national scale, but the reason that systems like this have never been successfully implemented is because of opposition from the Government.  If a system of currency only implies debts and credits between companies, with no residual value in the currency itself, the government becomes a dispensible accessory to commercial transactions.

I have elucidated my Grandfather’s ideas in a haphazard manner, and I would be surprised of anyone who reads this does not end up confused at least on some point (probably the last).  I will probably create another post to further elucidate my Grandpa’s points, but until then if you find yourself curious about anything I have said, please post a comment.

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3 responses to “How Scrip can Save us from the coming Depression

  1. interesting article…

    have a look at my article on local currency:

    http://www.joshuazeidner.com/2008/03/in-we-we-trust-prospect-of-local.html

    there are a number of links there regarding local currency (scrip) tools and information.

  2. But what’s the dollar then? In do anything with dollars, you’d need to convert them to pesos, would you take a loss there too?

    Anyway, what would likely happen is companies would set up that sell fake products, which they would buy back (at a small discount, < 5%) later, to reset the 1 year limit.

    What you’re advocating is money as a commodity. Bank notes were the first form of paper money (I think), which prevented any monopolies on the money supply. Of course, now all bank notes are Federal Reserve Notes, which vendors are legally obligated to accept.

    Of course, to have a bank note system, you’d also need a gold standard or something to keep banks from printing money forever. And I doubt the government is going to nail itself down like that.

  3. Good comments, Enginerd. Depends on how much the government wants to encourage commerce. I imagine some sort of adjustable rate would be possible; the idea being to encourage people to put their stored capital to use in commercial enterprise. the rate at which you would exchange would have to be adjusted with people’s propensities towards saving / investing in mind. That is, you would have to create enough incentive for people to put their capital to use in commercial enterprise, and enough disincentive to make sure people do not immediately convert their hard-earned pesos into ‘dollars’ which one could trade on international currency exchanges and use to purchase stock/commodity futures, etc.

    Once you get into the details, you see that different rates must be instituted for foreign buyers of the ‘peso’. There are many important considerations, but I think my main point is that separating the interests of capital and commerce by creating two currencies is important.

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